University of Essex - Centre for Computational Finance and Economic Agents

Date Written: February 1, 2017

Abstract

We analyse systemic risk in the global banking system using a new network-based spectral eigen-pair method, which treats network failure as a dynamical system stability problem. This is compared with market price-based Systemic Risk Indexes (SRIs), viz. MES (Marginal Expected Shortfall), ∆CoVaR, and SRISK in a cross-border setting. Unlike paradoxical risk measures, the eigen-pair method gives early-warning of instability in terms of tipping points identified by regulatory capital thresholds and centrality measures for systemically important and vulnerable banking systems. Market price-based SRIs are contemporaneous with the crisis and they are found to covary with risk measures like VaR and betas.